IMPORTANT LEVELS ON INDICES

The 13200 number appears to be an important level for the Dow. Its around the early December lows. A close below 13200 could see a pullback to test the November lows.

The S&P 500 is currently below is support level of 1460 and is signalling a retest of 1400 is in order.

The Nasdaq appears to be ready to fill its gap around 2580 or so.

The markets are weak this morning despite the Fed credit auction that will occur later today and word of more liquidity injections. Despite current weakness I would not rule out a rally in the closing hours.

MARKET UPDATE

Will we get a strong close like yesterday or will we sell off ? The market opened weak and attempted a rally and currently it is retesting the lows. A successful test may mean a rally into the close. From a bullish perspective a strong close is good. But I am currently leaning more towards the bearish side and I wonder what happends if we don't get a strong close. The wheels could fall of the market fast.

I added more QID SRS SKF FXP a little earlier though I may sell them if I see strength going forward.

DON'T BET AGAINST THE BULL

Or perhaps don't bet on the bear. Either the bulls have remarkable resilience or the bears lack the ability to take control of the market. To be fair, the bulls have Bernanke on their side in the form of liquidity injections - don't think I didn't see that liquidity injection today Ben !

As I mentioned in my earlier post, I expected a late day rally if the bears were unable to force the issue. We got one as expected though how much of it can be attributed to Bernanke liquidity injections one cannot tell. Their appears to be a lot of indecision in the market though th efact we held above yesterdays lows is a positive for the bulls.

I added a little FXP SRS and SKF towards the end of the trading session. Sold some QID midday. SRS and SKF appear to be a better hedge than QID.

While the Dow and S&P both finished in the green, most of my major positions were in the red save HANS and NYX. 18 of 30 Dow components finished higher led by HON MSFT BA HPQ UTX . Its pretty easy to get the Dow green when you pump up some of the bigger components.

LOOKING AT NUMBERS

The market has opened weak today though the bears have not really taken full control with the bulls still hanging around. If this continues, I think the bulls could come back strong in the final two hours of trading.

A few numbers to look at. 14198 13962 13780 . These are three intermediate tops set on the Dow between early October and now with the latest figure occuring on Tuesday. The lows have been 13407 and 12724 . So we are in fact making lower highs and lower lows over the last 2 months. If 13780 does indeed stay as a high number in the short term, we are likely to see a lower low than 12724 in the coming weeks. I reckon from judging the point difference between the two lows 13407 and 12724, the next low could very well be around 12000. Perhaps even test the February/March lows of 11939.

The S&P 500 tells a similar story with highs being 1576 1552 and 1523 with the corresponding lows being 1489 and 1406.

The Nasdaq has been a different story with its late October high of 2861 breaking its earlier high of 2834. The recent high is 2734 with the low being 2539. The Nasdaq while being the strongest of the indices is also more volatile and could thus see more downside in a downturn.

FADE THE RALLY

The rally today has been extremely fadeable. I stared in shock as I witnessed the Dow up over 200 with the Nasdaq and S&P up over 50 and 30 respectively. All this because of the news that the The Federal Reserve, European Central Bank and three other central banks are moving in concert to alleviate a credit squeeze by pumping liquidity into the credit markets via auctions. This move is just another way of the Fed signalling that the credit markets are in deep shit. I think the crisis is still in the early stages and will get worse over time. The Fed is better of staying clear of the mess and allowing the market to settle things on their own way. Sure a few big banks may collapse in the process but this is the only way to prevent future such occurences. A bailout will only make things worse in the future as financial institutions fail to learn a lesson.

Today I added more QID SRS and took a position in the double inverse financial ETF SKF. Short financials and real estate will be the play for 2008. This is a trend that will continue for a while.

I sold out of my C position last week. The new CEO does not seem to be the right man for the job. More of a follower than a leader. I think C will see more downside perhaps even into the teens.

FED GIVES BULLS THE MIDDLE FINGER

Not quite the middle finger - an unchanged rate would have been the equivalent but close enough. A half point interest rate cut expectation by Wall Street was not on the cards as the Fed choose to cut rates by a quarter sending the stock market substantially lower though based on the volatility over the last few months , a 295 point drop in the Dow with 66 points on the Nasdaq and 38 on the S&P 500 is not such a big deal. The averages are still above strong levels of support and after such a strong rally the past few weeks a pullback is probably a decent buying opportunity.

Positions I had on today included QID FXP and SRS which all did well though my longs were pretty much beaten up across the board. I will continue to keep QID FXP SRS as hedges in these times of uncertainty .

The question on my mind right now is whether this pullback is a buying opportunity or the start of another leg down. If the preceeding rally was a result of hopefully investors expecting a half point interest rate cut, then is this a sell the news event considering we didn't even get the half point cut ? Are big funds going to play it safe here and close shop for the year ? - Play it safe due to uncertainty, keep their yearly gains and prepare for next year.

IS SUPRIME JUST THE TIP OF THE ICEBERG ?

The mortgage mess is just starting . Subprime was just the tip of the iceberg. This article by a mortgage insider courtesy of Herb Greenberg is worth reading. The real blow up is going to occur in the Neg Am Pay Option ARM arena where essentially people with incomes as low as $80,000 were qualifying for million dollar loans. Most of these people have good credit but unfortunately no conventional loan program is going to save them as their mortgages reset. A whole lot of foreclosure are going to occur in the million dollar plus range especially in California where home prices are ridiculously high to start with.

Having spoken to a fair number of mortgage industry insiders, I happen to believe the assessment in the Greenberg article is pretty accurate. While the whole nation and world for that matter focuses on Subprime, there is an even larger problem lurking ahead and it appears the mainstream media is not paying attention. The Fed can continue lowering rates, but this is not going to fix the issues at hand. Bush, Paulson, Bernanke and Co. can come up with all the short term fixes they want but the inevitable is looming around the corner. We are going to face a drastic real estate correction and a recession is all but guaranteed. Keep in mind most economists and market pundits don't call it a recession until we are more than half way through one. I don't recall anyone calling the 2001 -2002 slow down a recession until the later parts of 2002.

Goldmans Analyst High

The highlight of the trading day for me was reading the following

Abby Joseph Cohen, the Goldman Sachs Group Inc. strategist
whose call for a year-end rally in U.S. stocks hasn't come true, predicted the
Standard & Poor's 500 Index will rise 14 percent by the end of next
year. Cohen, 55, says the S&P 500 will climb to a record 1,675 .. Bloomberg

Keep in mind Cohen is the crazy old lady who was recommending internet stocks in 2000-2001. She disappeared from the circuit for the next few years before appearing to resurface last year.

Its hard to see the S&P 500 climbing as companies cut earnings and financials continue taking hits. In an environment where earnings estimates are being cut, the S&P 500 is likely to trend lower.

Analysing the indices, the S&P is facing resistance at its 200 day moving average at 1484. The Dow closed below its 200 day ma of 13255 and that level may act as resistance in the coming days. 13467 and 13579 are two other levels of resistance. The Nasdaq is facing resistance at 2696 and the 50 day ma 2718. I feel the market will test its lows and possibly head even lower.

WATCH THE YEN

Keep an eye on the Japanese Yen as it continues to get stronger this morning. US equities have a strong inverse correlation to the Yen and the carry trade continues to unwind with a stronger Yen.

The ISM Manufacturing Index is the major economic report out today. Keep an eye on this one as it has a strong ability to move the market.

A recession is already here for corporate profits not to mention housing. Is the US economy next ?

Moodys is cutting ratings on another $105 billion of SIVs. Further write downs are likely to follow.

Is the stage being set for a Dollar rally in 2008 ? Nobody wants anything to do with the Dollar and it appears the dumb money are moving out of the USD - think Gisele Bundchen and Jay Z. A Dollar rally will probably hasten a decline in US equities since US markets have risen in the since 2003 by the same percentage as the USD has declined. Given a scenario of a rising Dollar, US equities may fall as a result.

I added some more QID and FXP into the close on Friday. Lets see how things turn out today.